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Monday 21 July 2014

14-169MR ASIC accepts enforceable undertaking from The Royal Bank of Scotland

ASIC today accepted an enforceable undertaking (EU) from The Royal Bank of Scotland plc and The Royal Bank of Scotland N.V. (RBS) in relation to potential misconduct involving the Australian Bank Bill Swap Rate (BBSW).

RBS will also make a voluntary contribution of $1.6 million to fund independent financial literacy projects in Australia.

This is the third outcome ASIC has achieved as part of its ongoing enquiries in relation to the BBSW submission process. UBS AG and BNP Paribas have each entered into EUs and paid a $1 million voluntary contribution (refer: 13-366MR and 14-014MR).

Following ASIC enquiries, RBS reported to ASIC that it had found evidence of conduct seeking to influence its BBSW submissions, based on how the submissions may benefit RBS's derivatives positions. RBS had withdrawn from the BBSW submissions panel on 30 April 2012.

RBS also reported to ASIC that it had found limited instances of communications discussing trading of Reference Bank Bills with reference to the setting of BBSW.

As a result of the information provided by RBS and ASIC’s enquiries, ASIC is concerned that RBS may not have complied with its obligations under the Corporations Act by reason of its conduct in relation to the BBSW rate set process.

The EU requires RBS to ensure its contribution to Australian interest rate benchmark settings is in accordance with its obligations under the United States Commodity Futures Trading Commission (CFTC) Orders. RBS is also required to undertake certain remedial measures with respect to its trading in Reference Bank Bills. An Independent Compliance Expert will be required to review and report on RBS’s compliance with the EU in respect of these remedial measures. ASIC will make public the outcome of that review.

Background

The BBSW is the primary interest rate benchmark used in the Australian financial markets. Prior to 27 September 2013, it was calculated based on submissions made by up to 14 panel banks to the Australian Financial Markets Association (AFMA), who are responsible for administering the published BBSW rate.

The calculation of BBSW substantially differs from the method that is used to calculate the London Interbank Offer Rate (LIBOR), in that BBSW submissions were required to be based on the panel banks' view of the average mid-rate for Reference Bank Bills, which are of similarly high credit standing, at a particular point in time each day as opposed to a subjective view of the bank's cost of obtaining unsecured funding from other banks.

On 6 February 2013, the CFTC issued orders against The Royal Bank of Scotland plc and RBS Securities Japan Limited in relation to misconduct in respect of the LIBOR. These orders involved undertakings by these entities as to the integrity and reliability of benchmark interest rate submissions globally.

RBS has cooperated fully with ASIC in relation to ASIC’s investigation into the reported conduct.

As of 27 September 2013 the BBSW is now electronically calculated, and as such there is no longer the need for panel banks to make submissions.

ASIC is closely monitoring international developments in relation to benchmarks, including the work of the Financial Stability Board and of the Task Force on Financial Market Benchmarks established by the International Organization of Securities Commissions (IOSCO). ASIC is participating in the IOSCO task force.

ASIC’s inquiries in relation to the BBSW submission process and trading in Reference Bank Bills are ongoing.